Federal Commissioner of Taxation v. Kareena Hospital Pty. Limited.

Judges:
Bowen CJ
Brennan J
Lockhart J

Court:
Federal Court of Australia

Judgment date: Judgment handed down 20 December 1979.

---

Bowen C.J.: These four appeals concern the operation of sec. 260 of the Income Tax Assessment Act 1936. The facts are set forth in detail in the reasons for judgment of Brennan and Lockhart JJ. and I shall not recapitulate them.

I am in general agreement with the reasons of my brethren and with their conclusion that the appeals should be dismissed with costs but will add some observations of my own.

The Commissioner of Taxation by the application of sec. 260 seeks to assess the taxpayer for the income year ended 30 June 1973 upon $103,023 and for the income period ended 30 June 1974 upon $13,115. These two amounts represent not the sum of particular payments received by the taxpayer from International but precisely the net profit earned by International in those two periods.

The Commissioner did not seek to support the assessments before us upon the basis that the arrangements between the various parties, including the taxpayer and International, should be held to be a sham. This might have been the basis for an argument that the taxpayer was still the holder of the lease, the employer of the labour and was still conducting the business which earned the profit in the two periods in question. An argument that the arrangements constituted a sham seems to have been presented in the Court below. It was not advanced before us and it may be added that it would have had little prospect of success if it had been.

Nor was it argued on behalf of the Commissioner that the assessments could be supported on the basis that although the arrangements were real, International in conducting the business and earning the profit was acting as the agent of or the trustee for the taxpayer or was in effect the alter ego of the taxpayer. The facts in evidence do not support such a case. International was a company which existed before the arrangements which the Commissioner seeks to attack were entered into. The whole purpose of the arrangements was that the taxpayer would cease to conduct the business and that International would conduct it and earn any profits for itself.

The Commissioner relies upon sec. 260. But this is an annihilating section; it cannot be used for the purpose of reconstructing events which did not occur. The Commissioner has not claimed in his assessment, in his particulars or in the argument presented on his behalf that the equitable charge was annihilated. Unless he does it is difficult to see how it could be successfully contended that payments received by the taxpayer from International in discharge of the amounts secured by the equitable charge were anything but capital receipts in the hands of the taxpayer. Even if one does assume the annihilation of the equitable charge by force of sec. 260, the situation of the Commissioner is not much improved. The amounts actually paid by International to the taxpayer are reflected in the loan account of the taxpayer in the books of International. If one assumes the

---

ATC 4669

annihilation of the equitable charge and pays regard simply to the passing of money, one still has a situation disclosed where a loan has been made by the taxpayer to International and a somewhat haphazard series of payments has been made in reduction of that loan. The amounts paid in the two periods in question do not bear any observable relationship with gross receipts or with the amount of net profit of the business.

As I have said, the Commissioner has assessed the taxpayer not in respect of the amounts paid by International to the taxpayer but in respect of the net profit earned by International in each of the two periods. In each period this represents not an amount received by the taxpayer but the difference between receipts and outgoings calculated upon an accountancy basis in relation to the operations of International. There is no evidence which would support the view that International earned the gross receipts or paid the outgoings as the agent of or the trustee for the taxpayer or as the alter ego of the taxpayer. It earned the receipts for itself as a result of contracts it entered into with patients and it paid the outgoings in discharge of obligations it had undertaken, including obligations to the employees. Even if sec. 260 annihilated the arrangements between the various parties it appears to me it could not be used in such a way as to reconstruct the situation so that the gross receipts were received by the taxpayer and the outgoings were expended by it or so as to show that the taxpayer, in effect, conducted the business and earned the net profits. It is not sufficient that the economic position of the taxpayer may appear to be close to what it would have been if it had carried on the business. The ineluctable fact disclosed after any annihilation of arrangements is that during the periods in question the business was not carried on by the taxpayer.

In the result I am of the opinion that the appeals should be dismissed with costs.